China: China’s new VAT rates and rules across all industries

International Tax Review is part of Legal Benchmarking Limited, 1-2 Paris Garden, London, SE1 8ND

Copyright © Legal Benchmarking Limited and its affiliated companies 2025

Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement

China: China’s new VAT rates and rules across all industries

ho-khoonming.jpg
lu-lewis.jpg

Khoonming Ho

Lewis Lu

On March 24 2016, China's Ministry of Finance and the State Administration of Taxation jointly issued Circular Cai Shui [2016] 36 (Circular 36) which contains the Value Added Tax (VAT) rates and rules applicable to the expansion of China's VAT system to several key sectors such as real estate and construction, financial services, and lifestyle services, which take effect from May 1 2016.

China's indirect tax system has, for many years now, been a bifurcated system with VAT broadly applying to the goods sectors, and Business Tax (BT) applying to the services sectors. Given that BT is essentially a tax on business which cascades throughout a supply chain, and is generally regarded as being an inefficient form of taxation, the Chinese government has been embarking upon a programme of progressively replacing BT with VAT since 2012. While the early stage of the VAT reform programme involved the VAT rules for certain sectors being implemented progressively on a province-by-province basis, in more recent times the implementation of VAT has been done nationwide on an industry-by-industry basis.

This final stage represents a 'big bang' approach, with all remaining sectors transitioning from BT to VAT nationwide with effect from May 1 2016, and they are:

  • Real estate and construction;

  • Financial services; and

  • Lifestyle services, which encompasses hospitality, food and beverage, healthcare, education, cultural and entertainment services, and a general residual category of any other services which are still subject to BT.

These three key industries represent, in policy terms, the most difficult industries to apply a VAT to, and moreover, in financial terms they are the most significant industries contributing to local government revenues. From a policy perspective, they can present challenges in applying a VAT to their services, given that:

  • the value added in financial services can be difficult to measure on a transaction-by-transaction basis, which explains why most countries exempt them from a VAT;

  • gains from real estate transactions may arise from passive activity (that is, simple increases in property values), or from actively improving the property, such as building and construction. The real estate industry also affects a broad range of stakeholders, from experienced developers, to investors, to speculators and private individuals. It is also subject to many other types of taxation already; and

  • lifestyle services can be consumed for business purposes or for private purposes, and differentiating between them can be difficult. In many cases they are also primarily cash based businesses where tax compliance may not be high.

When fully implemented, China's VAT system will be one of the broadest-based systems among more than 160 countries in the world which have now implemented a VAT (or equivalent tax). China's VAT system will be unique by international standards in applying VAT to virtually all financial services (including interest income), and in applying VAT to real estate transactions involving not only B2B and B2C transactions, but C2C as well – an outcome not known to exist in any other country. It would not be surprising to see other governments follow China's lead and expand their VAT systems, especially if China is able to implement these changes successfully.

For more insight into the BT2VAT initiative, visit www.internationaltaxreview.com for information put together for ITR by the Chinese SAT and Minister Wang Jun.

Khoonming Ho (khoonming.ho@kpmg.com) and Lewis Lu (lewis.lu@kpmg.com)

KPMG China

Tel: +86 (10) 8508 7082 and +86 (21) 2212 3421

Website: www.kpmg.com/cn

more across site & shared bottom lb ros

More from across our site

FTI Consulting’s EMEA head of employment tax and reward tells ITR about celebrating diversity in the profession, his love of musicals, and what makes tax cool
Canadian Prime Minister Mark Carney and US President Donald Trump have agreed that the countries will look to conclude a deal by July 21, 2025
The firm’s lack of transparency regarding its tax leaks scandal should see the ban extended beyond June 30, senators Deborah O’Neill and Barbara Pocock tell ITR
Despite posing significant administrative hurdles, digital services taxes remain ‘the best way forward’ for emerging economies, says Neil Kelley, COO of Ascoria
A ‘joint understanding’ among G7 countries that ‘defends American interests’ is set to be announced, Scott Bessent claimed
The ‘big four’ firm’s inaugural annual report unveiled a sharp drop in profits for 2024; in other news, Baker McKenzie and Perkins Coie expanded their US tax benches
Representatives from the two countries focused on TP as they met this week to evaluate progress under a previously signed agreement – it is understood
The UK accountancy firm’s transfer pricing lead tells ITR about his expat lifestyle, taking risks, and what makes tax cool
Dolphin Drilling intends to discuss the final liability amount and manner of settlement with HM Revenue and Customs
Winning the case against the 20% VAT imposition was always going to be an uphill challenge for the claimants, UK tax advisers argue
Gift this article